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Untangling the IRA rules.

The Code's individual retirement account (IRA) provisions were enacted by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage individuals to save for retirement. According to a study by the National Institute on Aging,(1) however, many eligible taxpayers are not using IRAs and will have no retirement income other than social security. These individuals should be made aware of the tax benefits of IRAs and encouraged to fund such accounts, if possible.

IRAs were first permitted in 1975. Initially, they were available only to individuals who were not active participants in employer-provided retirement plans. The Economic Recovery Tax Act of 1981 (ERTA) removed the restriction on active participants, making such accounts available to all individuals. This change was made to increase the level of personal retirement savings and allow uniform discretionary retirement savings arrangements. By 1986, however, Congress decided that the expanded IRA provisions were not meeting their intended purposes, since the level of personal savings had not increased appreciably since 1981. Additionally, IRA investment was lowest among taxpayers with adjusted gross income (AGI) under $30,000 and highest among those with AGI in excess of $50,000. Consequently, the Senate Report to the Tax Reform Act of 1986 (TRA) recommended reinstating the pre-ERTA rules limiting IRA deductions to individuals not covered by employer-provided retirement plans.(2) This recommendation, as well as Congress's desire to maintain a tax incentive for discretionary retirement savings by providing for nondeductible IRA contributions, were included in the TRA.

This article will review the basic rules of IRA contributions and distributions and discuss tax planning opportunities.

Contributions

Current law governing the deductibility of IRA contributions was established by the TRA. The TRA's broad revisions to the deductibility of IRA contributions have generally made saving for retirement more complicated, thereby making contributing to IRAs less attractive for many taxpayers. Flowchart I on pages 502-503 illustrates the general rules governing annual IRA contributions. The discussion that follows is based on this flowchart.

Except for rollovers, IRA contributions must be (1) in the form of cash and (2) made only by taxpayers under age 701/2 before the close of the tax year.(3) Contributions made after age 701/2 are excess contributions subject to a penalty (to be discussed later).

* Contributions for nonactive participants

Individuals who are not "active participants" (as defined in Sec. 219(g)(5)) in an employer-maintained retirement plan can make deductible IRA contributions. Individuals covered by any of the following during any part of a plan year ending with or within the individual's tax year are "active participants": (1) a qualified pension, profit-sharing or stock bonus plan described in Sec. 401(a); (2) a qualified annuity plan described in Sec. 403(a); (3) an annuity contract under Sec. 403(b); (4) a simplified employee pension plan under Sec. 408(k); (5) a Federal or state government employee retirement plan; or (6) a trust under Sec. 501(c)(18).(4) Deductible contributions are generally limited to the lesser of $2,000 or 100% of taxable compensation for the year.(5) "Taxable compensation" includes disability pay, unemployment compensation, accrued annual leave, sick leave, alimony, incentive awards, termination pay, wages, salaries, bonuses, tips and commissions. For a partner or sole proprietor, compensation is generally the partner's distributive share of partnership income or the proprietor's net business earnings if the partner or proprietor renders material income-producing personal services to the business. Compensation does not include income from pensions, annuities and other forms of deferred compensation.(6)

Married individuals qualify for the full deduction only if both spouses are not active participants in an employer-maintained retirement plan. Each spouse may then claim the maximum $2,000 IRA contribution deduction ($4,000 total) if they otherwise qualify under the rules described above. Additionally, a married taxpayer filing a joint return with a noncompensated spouse may, under certain conditions, deduct contributions to an IRA established for the spouse's benefit ("spousal IRA"). If neither spouse is an active participant in an employer-sponsored retirement plan during the year, the contributions to a spousal IRA are deductible to the extent of the lesser of $2,250 or the contributing spouse's compensation. The spouses may divide the contribution between them as they choose, as long as neither spouse's contribution exceeds $2,000.(7) A spouse can also elect to be treated as having no compensation if the spouse earns a small amount of income (presumably, less than $2501 during the year.(8)

* Contributions for active participants

Active participants in certain employer-sponsored retirement plans are not allowed IRA deductions if they have AGI of at least $35,000 (single) or $50,000 (married filing jointly).(9) AGI for this purpose is figured under Sec. 219(g)(3)(A) before IRA deductions and without regard to the allowable exclusions under Sec. 135 (higher education expenses financed with qualified U.S. savings bonds) and Sec. 911 (foreign earned income), but after application of Sec. 86 (taxability of social security) and Sec. 469 (passive losses). Deductions for single taxpayers with AGI between $25,000 and $35,000 and married taxpayers filing jointly with AGI between $40,000 and $50,000 are ratably phased out, by reducing the potential $2,000 deduction by an amount that bears the same ratio to $2,000 as the individual's AGI in excess of the applicable dollar amount ($25,000 or $40,000) bears to $10,000. If the reduction amount is not a multiple of $10, it is rounded to the next highest multiple of $10. If the computation yields a deduction that is less than $200, $200 may be claimed.(10)

Example 1: T, a taxpayer, is an active participant in an employer-sponsored retirement plan. He has AGI of $33,500 before the IRA deduction. The portion of the IRA deduction disallowed is $1,700 [$2,000 x ($8,500 / $10,000)]. Thus, Tis allowed a maximum $300 IRA deduction ($2,000 - $1,700).

Note: The phaseout amounts are not indexed for inflation. Consequently, active participants in employer-sponsored plans may experience a complete loss of IRA deductions over time.

* Nondeductible contributions

Nondeductible IRA contributions are allowed to the extent that deductible contributions are disallowed. Annual contributions to any IRA cannot exceed the lesser of $2,000 ($2,250 with a spousal IRA) or 100% of taxable compensation. Income earned on nondeductible contributions is not taxed until distributed to the owner. An election to treat normally deductible contributions as nondeductible should be made if a taxpayer has no taxable income after other deductions. This would prevent the contribution from being considered taxable income when distributed in the future. Taxpayers who make nondeductible contributions must file Form 8606, Nondeductible IRAs (Contributions, Distributions, and Basis), along with Form 1040. A $50 penalty is imposed for each failure to file Form 8606, and a $100 penalty is imposed for each overstatement of the nondeductible amount.(11)

* Excess contribution penalty

Contributions to IRAs that exceed the allowable limits are generally subject to a 6% penalty per year until corrected(12); thus, a taxpayer needs to exercise due care in making contributions. However, the penalty may be avoided if an excess contribution made in a year is withdrawn before the due date of the return (including extensions) and no deduction is claimed under Sec. 219 for the withdrawn contribution. Additionally, any income earned on the excess contribution must be withdrawn. The income is subject to regular income tax for the year in which the excess contribution was made and may be subject to a 10% penalty as a premature distribution (to be discussed later). If the taxpayer fails to avoid the 6% penalty for excess contributions in the current year, the yearly imposition of tax in future periods can be stopped by withdrawing the excess contributions after the due date of the return (including extensions). These withdrawals are not included in income if no deduction was claimed for the excess amount and the total contributions for that year did not exceed $2,250. The yearly penalty may also be stopped by making smaller contributions than otherwise allowed to offset the excess contributions. For example, an excess contribution of $250 made in 1993 could be offset by making only a $1,750 contribution in 1994 if the taxpayer is otherwise entitled to claim a $2,000 deduction in 1994. Form 5329, Additional Taxes Attributable to Qualified Plans (Including IRAs), Annuities, and Modified Endowment Contracts, is used to calculate the excise tax.

Distributions

Amounts distributed from an IRA are normally taxed as ordinary income under the Sec. 72 annuity rules. Consequently, nondeductible IRA contributions are not taxed when withdrawn. For purposes of these rules, however, all of the taxpayer's IRAs are treated as one contract and all distributions during a year are treated as one distribution. The value of the contract (determined after adding back distributions made during the year), income on the contract and investment in the contract are computed as of the close of the calendar year in which the tax-year begins.(13) In addition to regular taxation, some distributions may be subject to penalties that are imposed on items such as early withdrawals and insufficient distributions. Taxpayers should be aware of the tax consequences arising from premature withdrawals, prohibited transactions, return of excess contributions, required minimum distributions and excess distributions. Flowchart II on pages 504-505 covers the rules pertaining to IRA distributions.

* Premature withdrawals

A premature distribution occurs when an individual receives or withdraws funds from an IRA before age 59 1/2, unless he is disabled or receives the distribution in the form of an annuity based on life expectancy.(14) An individual may avoid a premature withdrawal if amounts withdrawn are transferred to other IRAs or retirement plans under certain rollover rules (described below). Premature distributions are subject to a 10% penalty in addition to any regular income tax.(15)

Rollovers: A distribution actually received by a taxpayer from one IRA may be rolled into another IRA without tax consequences if it is accomplished by the sixtieth day following the day the taxpayer received the funds.(16) However, this kind of distribution can occur only once in a one-year period for each IRA the taxpayer owns. Because this type of rollover is subject to 20% withholding under Sec. 3405(c), the taxpayer will only receive 80% of the funds. To roll over 100% of the distribution, the taxpayer must replace the withheld 20% with other funds. If less than 100% is reinvested, a partial rollover has occurred; such rollovers are permissible, but the amount not rolled over is subject to tax and possible penalty as a premature distribution.

If an individual has the assets of one IRA transferred directly to the trustee of another IRA without actually receiving the funds, no distribution has occurred. Such transfers are not subject to the one-year waiting period, nor does the 20% withholding rule apply.

Rollover treatment is not always permitted. For example, required minimum distributions (discussed later) cannot be rolled over. Also, under Sec. 408(d)(3)(C), amounts received from an IRA because of the death of the holder may not be rolled over unless the recipient is the surviving spouse.

* Prohibited transactions

A prohibited transaction with an IRA may result in an unplanned premature distribution with attendant tax consequences, even if no amounts are actually withdrawn.(17) Prohibited transactions generally involve improper use of the IRA, such as "self-dealing" by the owner, the owner's fiduciary or members of the owner's family. Common examples of prohibited transactions involve owners borrowing money from their IRAs or using them as security for loans. If money is borrowed from an IRA by its owner or the beneficiary, the account will be disqualified and the fair market value (FMV) of the assets as of the first of the year will be deemed distributed to the owner. If the IRA is used as security for a loan, the penalty is less severe: only the pledged portion of the account is deemed to be distributed; the IRA is not totally disqualified. The distribution is deemed to occur on the date of the pledge.(18)

There are two other areas of concern for IRA owners: (1) investing in collectibles and (2) receiving benefits from a financial organization. If an IRA invests in collectibles--generally, artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and similar tangible personal property(19)--a distribution is deemed to have occurred equal to the cost of the investment.(20) This penalty is similar to the one for using an IRA as security on a loan.

For a time, the receipt of premiums or other benefits from a financial organization was of concern, because the Department of Labor (DOL) believed these items could be construed as a prohibited transaction. Specifically, the transaction constituted the receipt by a fiduciary of consideration from a party dealing with the IRA's income or assets. The IRS, however, had indicated that it would not treat the receipt of such premiums as a prohibited transaction while awaiting the DOL's decision on a request for an administrative exemption for such transactions, if certain conditions were met.(21) In 1993, the DOL issued two exceptions to the prohibited transaction rules for certain types of IRA deposit premiums and services.

Under the first exception, financial institutions can offer cash or other premiums as incentives for opening or making additional contributions to IRAs without triggering the prohibited transaction penalties,(22) if three conditions are met: (1) the IRA, in connection with which cash, property or other consideration is given, must be established solely to benefit the participant, the participant's spouse and their beneficiaries; (2) the cash, property or other consideration must be given only in connection with the establishment of the IRA or the making of an additional contribution, including the transfer of assets from another plan to an existing IRA; and (3) during any tax year, the total of the cash and FMV of the property or other consideration received must not exceed $10 for deposits to the IRA of less than $5,000, and $20 for deposits of $5,000 or more.

A second exception allows banks to provide institutional services at a reduced or no-cost basis to IRA account holders or their families.(23) The IRA account balance must be taken into account in determining eligibility for such services. Additionally, the following conditions must be met: (1) the IRA must be established and maintained for the exclusive benefit of the participant covered under it, his spouse, or their beneficiaries; (2) the services must be of the type that the bank itself could offer, consistent with applicable Federal and state banking laws; (3) the services must be provided by the bank (or its affiliate) in the ordinary course of business to customers who qualify for reduced or no-cost banking services but do not maintain IRAs with the bank; (4) in determining eligibility to receive services at reduced or no cost, the IRA deposit balance required by the bank must equal the lowest balance required for any other type of account that the bank includes to determine eligibility to receive reduced or no-cost services; and (5) the rate of return on the IRA investment must be no less favorable than that on an identical investment that could have been made at the same time and at the same branch by a customer not eligible for (or not receiving) reduced or no-cost services.

* Return of excess contributions

In certain situations, an excess contribution may be withdrawn from an IRA without being treated as a distribution from the account; thus, it would not be subject to the premature distribution rules. Additionally, the removal of the excess contribution would prevent or stop the 6% penalty for excess contributions. Excess contributions withdrawn before or after the due date of the return (including extensions) may qualify for this treatment.

Any excess IRA contribution for a year that is withdrawn before the due date of the return for that year (including extensions) will not be treated as a distribution if (1) no deduction is allowed for the excess contribution and (2) the return of the contribution is accompanied by the income earned thereon.(24) The income earned on the excess contribution is included in income for the year in which it was made and is subject to the rules for premature withdrawals.

Example 2: On Jan. 1, 1993, A, a 55-year-old calendar-year taxpayer, contributes $1,500 to an IRA. For 1993, A is entitled to an IRA deduction of only $1,400, and A's tentative gross income for 1993 is $9,334. On Apr. 1, 1994, $107 is distributed to A from his IRA, $100 excess contribution and $7 of income earned thereon. A will include only $7 of the $107 distributed on Apr. 1, 1994 in his gross income for 1993. Thus, A's AGI for 1993 is $7,941 ($9,334 + $7 - $1,400 IRA deduction). Further, A will pay an additional penalty of $70 in 1993 for the premature distribution of the earnings.(25) A could avoid making the withdrawal and paying the tax and penalty by treating the $100 as a nondeductible contribution on Form 8606.

Even if the due date of the return has passed (including extensions), an excess contribution may be withdrawn without being treated as a distribution if aggregate contributions for the year (not including rollovers) did not exceed $2,250 and if no deduction was allowed under Sec. 219 for the excess contribution. If a deduction was allowed, the excess contribution may still be withdrawn without distribution treatment by filing an amended return, but only if aggregate contributions for the year were $2,250 or less.

* Required minimum distributions

Taxpayers may generally start to withdraw amounts from IRA accounts without penalty after they reach age 59 1/2, but there is no requirement that they do so. However, distributions must begin no later than April 1 of the calendar year following the year in which the owner reaches age 70 1/2 (the required beginning date),(26) even if the owner has not retired. The balance in the IRA may be withdrawn in a lump sum or in periodic payments made at least annually. Failure to comply with the rules for required minimum distributions may result in the imposition of a 50% penalty on the excess of the required minimum distribution over any actual distribution (to be reported on Form 5329). Because of the severity of this penalty, taxpayers should make sure to take required distributions.

If the required distributions are to be made over a period of years, the distribution made by April 1 is treated as if it had been made for the previous year in which the taxpayer turned 70 1/2. Distributions for subsequent years must be made by December 31. This causes two distributions to be required in one tax year if the first payment is deferred to April 1 of the year following the year in which the taxpayer turned 70 1/2. This result can be avoided by making the first distribution in the year the taxpayer turns 70 1/2. Required distributions from IRAs cannot be rolled over into other qualified plans to avoid the minimum distribution rules. individuals must calculate the required minimum distributions separately for each IRA. However, once the minimums are determined, the total distribution may be taken from any one or more of the individual's IRAs, but only if the individual must receive minimum distributions because he has reached age 70 1/2 or because he is a beneficiary of a deceased IRA holder. The minimum distribution that must be made depends on whether the distribution is made before or after the IRA owner's death.

Required distributions before death: If the taxpayer is living and chooses to make periodic withdrawals at the required beginning date, the IRA distributions may extend over (1) the life expectancy of the individual, (2) the joint life expectancies of the individual and a designated beneficiary, (3) a term certain not exceeding the life expectancy of the individual or (4) a term certain not extending beyond the joint life expectancies of the individual and a designated beneficiary. The initial required minimum distribution is .determined by dividing the IRA account balance as of the close of the previous year by the owner's life expectancy (or joint lives) based on the attained age as of the birthday in the year the owner turns age 70 1/2.(27) For subsequent years, the appropriate life expectancy multiple is to be recalculated annually using the then-current life expectancy multiple, unless the plan provides otherwise. This recalculation is not permitted for a nonspousal beneficiary. if life expectancy is not recalculated, the life expectancy of the initial year is reduced by one year for each calendar year that has elapsed since the date on which the life expectancy was first calculated. As of the date of the first required distribution, the method chosen (recalculation or annual reduction) is irrevocable and must apply to all subsequent years. Example 3 demonstrates the calculation of the minimum distribution over the joint lives of a husband and wife.

Example 3: H reached age 70 1/2 on Apr. 1, 1993. W, his wife and beneficiary, turned 56 in 1993. H must begin receiving distributions by Apr. 1, 1994. H's IRA account balance at Dec. 31, 1992 was $29,000. Based on their ages at year-end (Dec. 31, 1993), the joint life expectancy for H (age 71) and W (age 56) is 29 years from IRS tables.(28) The required minimum distribution for 1993, H's first distribution year, is $1,000 ($29,000 / 29). This amount must be distributed to H by Apr. 1, 1994. To figure the minimum distribution for 1994, the IRA account balance at Dec. 31, 1993 would be reduced by the $1,000 required minimum distribution for 1993 that was made in 1994.

Because IRA distributions are subject to the incidental benefit rule applicable to qualified plans, the present value (PV) of the periodic payments projected to be made to the owner while living must exceed 50% of the PV of the total payments projected to be made to the owner and his beneficiaries. This rule is intended to ensure that the IRA is for the primary benefit of the owner. The life expectancy and minimum distribution incidental benefit (MDIB) tables interact to limit the maximum age difference that may be taken into account for joint lives to 10 years, except in the case of a spouse.

Example 4: Assume the same facts as in Example 3, except that H's beneficiary is his 56-year-old sister. Since his sister is more than 10 years younger than he, H must use the smallest factor from the MDIB or life expectancy table to find the divisor for the required minimum distribution. Because the MDIB table lists a factor of 25.3,(29) H's required distribution would be $1,146 ($29,000 / 25.3), rather than the $1,000 from Example 3.

Required distributions after death: The required distributions to be made from an IRA account after the death of the owner depend on whether the owner had already started to receive distributions prior to death. if distributions had begun before death, the remaining account balance must be distributed to the beneficiary at least as quickly as the method of distribution used by the owner prior to death. However, spouses inheriting IRAs from persons dying after Dec. 31, 1983 may choose to treat the accounts as their own.(30) This election is made by making contributions (including rollover contributions) to the inherited IRA or by not taking otherwise-required distributions from the account. If the election is made, the surviving spouse is considered the individual for whose benefit the account is maintained. Hence, the surviving spouse's interest in the account would be subject to the normal distribution requirements of any IRA owner, rather than those applicable when the owner has died before the entire interest is distributed.(31)

When distributions have not begun before death, the IRA account balance must generally be distributed within five years of the IRA owner's death. However, as discussed above, spouses inheriting IRAs from persons dying after Dec. 31, 1983 may choose to treat the accounts as their own. There are two other exceptions to this five-year rule. First, it does not apply if (1) any portion of the deceased's interest is payable to a designated beneficiary, (2) the portion of the deceased's interest to which the beneficiary is entitled will be distributed over the life of the beneficiary (or shorter period) and (3) the distributions begin no later than one year after the date of the individual's death. Second, the five-year rule does not apply if (1) the portion of the deceased's interest to which a surviving spouse is entitled will be distributed over the life of the surviving spouse (or shorter period) and (2) the distributions begin no later than the date on which the decedent would have attained age 70 1/2.(32) Any amount paid to a child is treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches majority.(33)

* Excess distributions

A 15% penalty is generally imposed on retirement distributions in excess of $150,000 per year, including distributions from any qualified employer plan or IRA.(34) Persons subject to this tax would frequently not be users of the IRA provisions because of their income levels and active participation in employer-sponsored retirement plans. However, individuals planning lump-sum withdrawals from IRAs should be aware of the existence of this tax, since the withdrawals could raise retirement distributions above the limit. The tax does not apply to distributions that represent nondeductible contributions, and to certain other distributions.

Tax Planning

IRA contributions should be made as early in the year as possible to maximize tax and financial planning advantages. However, contributions for a particular year can be made up to the due date for filing that year's return (without extensions). This provision may be of benefit to someone who is short of funds. An individual who expects a tax refund could file early and claim an IRA deduction before actually making the contribution. The refund could then be used to fund the contribution if it is made by the due date of the tax return, usually April 15.

An individual who is temporarily short of cash may find it advantageous to borrow the amount to be contributed to the IRA. The interest incurred on the obligation may result in current tax deductions, while the IRA earnings accrue on a tax-deferred basis. Because IRA income is merely tax-deferred, not tax-exempt, the interest expense is not automatically disallowed as interest from a tax-exempt investment. The interest would, however, be subject to other Code provisions, such as the investment interest limitation.

Taxpayers needing money for a very short period of time may withdraw amounts from an IRA and use the funds without tax consequences, provided the funds are rolled into another IRA within 60 days. However, this technique can be used only once a year for each as previously discussed. if the funds are not reinvested within the 60-day limit, the amount withdrawn will be subject to the regular income tax and the premature distribution penalty. Also, this type of withdrawal is subject. to 20% withholding. The amount withheld must also be rolled over to avoid tax consequences. Hence, taxpayers using this strategy should be very careful to ensure that all amounts are rolled over.

Although IRAs were not intended as short-term savings vehicles, they may provide a taxpayer with a way to save that is better than a regular savings account, even when penalties are considered. The exhibit on page 508 illustrates how a 10-year savings plan using an IRA is better than a nondeferred savings account, even after penalties are assessed for a premature withdrawal. The exhibit assumes that tax savings from the IRA deduction were invested in a nondeferred savings plan. This strategy, however, is generally effective only when interest rates and marginal tax rates are fairly high. Thus, its use should be considered carefully.

Individuals who are contemplating using nondeductible IRAs may wish to consider annuities instead. Contributions to a nondeductible IRA are usually limited to a maximum of $2,000 per year, but no such limit applies to annuities. Annuities are generally taxed in the same manner as are nondeductible IRAs.

Conclusion

A recent study by the National Institute on Aging revealed that the average household income of 51-to 61-year-olds was $37,500. Additionally, 80% of these individuals were married. Thus, a substantial number of individuals in this age group would qualify for IRA deductions even if they were covered by qualified retirement plans at work. Unfortunately, 40% of them will have no retirement income other than social security. Clearly, many taxpayers who should be taking advantage of the IRA provisions are not doing so. It is particularly important for those without any type of retirement plan coverage at work to fund IRAs, as circumstances permit. For example, a taxpayer would have about $26,000 more in savings using an IRA rather than a nondeferred savings account after 25 years, assuming an interest rate of 6% and a marginal tax rate of 28%, even if the tax savings from deducting the IRA were not reinvested. If the tax savings were reinvested in a nondeferred savings account, an additional $24,353 would be available, for a total net advantage over a non-IRA savings plan of about $50,000.

Although older taxpayers who have not yet started an IRA may lack sufficient time to create a reasonable retirement fund, some value from starting an IRA now is better than no benefit. Younger taxpayers should start funding IRAs as soon as possible to avoid similar circumstances. For many taxpayers, IRA funding will reduce current taxes payable, resulting in a relatively painless way to save for retirement.

Because of potential penalties, taxpayers and their financial advisers should be aware of the basic rules governing contributions to and distributions from IRAs. Penalties may be imposed on excess contributions, premature withdrawals, insufficient distributions and excess distributions.

Comparison of an IRA Account With a Regular Account
Assumptions:
Interest rate: 10%
Marginal tax rate: 39.6%
$2,000 annual deposits are made at beginning of year to an IRA and regular savin
gs account.
$792 annual deposits are made at end of year to nondeferred savings account fund
ed from tax savings
from IRA deduction ($2,000 x 39.6%).
Funds are invested for 10 years, then withdrawn before age 70 1/2.
Balances at end of year 10 IRA savings Regular savings
Amounts available for withdrawal $35,062 $28,006
Normal tax imposed (13,885) 0
Penalty imposed (3,506) 0
Nondeferred savings account 10,459 0
Net total cash $28,130 $28,006


(1) A study released by the National institute on Aging, the University of Michigan and the Alliance for Aging Research. See "Financial Outlook Seen As Grim For Many Nearing Retiring," The Washington Post, 6/18/93, at A4. (2) S. Rep. No. 99-313, 99th Cong., 2d Sess. 543 (1986). (3) Sec. 219(d)(1). (4) Generally, individuals are active participants in defined benefit plans if they are not excluded under the eligibility provisions of the plans or, for defined contribution plans, whenever employer or employee contributions are allocated to the employee's account for the plan year. However, earnings credited to an employee by a plan are not contributions. See Notice 87-16, 1987-1 CB 446. (5) Sec. 219(b)(1). (6) Regs. Sec. 1.219-1(c). (7) Sec. 219(c). (8) TRA Section 1103(a). (9) Under Sec. 219(g), married individuals filing separately are not allowed deductible IRA contributions when either spouse's AGI reaches $10,000 if either is an active participant in an employer-sponsored retirement plan. However, married individuals who have lived apart for the entire year and who file separately are not married for purposes of the phase-out. Sec. 219(g)(4). (10) Sec. 219(g)(2). (11) Secs. 408(o)(4) and 6693(b). (12) Regs. Sec. 1.408-1(c)(1). (13) Sec. 408(d)(2). (14) Regs. Sec 1.408-1(c)(6). Individuals receiving IRA distributions from accounts of deceased persons that are required to be distributed are not treated as receiving premature distributions. (15) Sec. 72(t). (16) Sec. 408(d)(3); Regs. Sec. 1.408-4(b). (17) See Secs. 408(e)(2) and 4975; Regs. Sec. 1.408-1(c). (18) Sec. 408(e)(4). (19) Sec. 408(m)(2). Exceptions to the definition of collectibles include certain U.S. minted gold and silver coins acquired after 1986, and coins issued under the laws of any state and acquired after Nov. 10, 1988 (Sec. 408(m)(3)). (20) Sec. 408(m)(1). (21) The conditions were: (1) in determining eligibility for premiums, IRAs must be treated in the same manner as other accounts, (2) the premiums must not cause a rate of return for the IRA lower than that for comparable accounts and (3) the premiums must be generally available to other customers of the institution. Ann. 90-1, 1990-2 IRB 31. (22) Prohibited Transaction Class Exemption (PTCE) 93-1, Jan. 11, 1993 (58 FR 3567), effective Jan. 1, 1975. (23) PTCE 93-2, Jan. 11, 1993 (58 FR 3561), effective May 11, 1993. (24) Sec. 408 d 4 . (25) See the example at Regs. Sec. 1.408-4(c)(4). (26) Secs. 401(a)(9) and 408(a)(6). (27) Prop. Regs. Secs. 1.408-8, Q&A-5, and 1.401(a)(9)-1, Q&A F-1(a). (28) Regs. Sec. 1.72-9, Table VI. (29) Prop. Regs. Sec. 1.401(a)(9)-2, Q&A-4. (30) Prop. Regs. Sec. 1.408-8, Q&A-4; IRS Publication 590, Individual Retirement Arrangements (IRAs). (31) See Sec. 401(a)(9)(A) and (a)(9)(B). (32) Sec. 401(a)(9)(B)(iii). (33) SCC. 401(a)(9)(F). (34) Sec. 4980A.
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Title Annotation:individual retirement accounts
Author:Ransom, G. Michael
Publication:The Tax Adviser
Date:Aug 1, 1994
Words:5669
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